Banking royal commission interim report: Has Hayne hurt house prices even more?

House prices across Australia have fallen 1.4 per cent since the royal commission hearings started in March and with its interim report highlighting further risks to property borrowers, the smart money is on further falls...

House prices across Australia have fallen 1.4 per cent since the royal commission hearings started in March and with its interim report highlighting further risks to property borrowers, the smart money is on further falls.

The report highlighted the inadequacy of bank's use of the household expenditure measure index – one test used to see if someone has the capacity to take a home loan – as well as hinting at a clampdown on trailing commissions, which are ongoing payments given to mortgage brokers who sell loans.

But the commission also supported banks' rights to enforce loan agreement terms, another risk to those borrowing for property in a falling market, especially speculators.

The Property Council of Australia chief executive Ken Morrison said the interim report reinforced expectations that banks would grow more cautious in lending for property and that slower credit would inevitably have an impact on property prices.

"The view is that credit is harder to get now and is likely to get even harder on the other side of the royal commission," Mr Morrison said.

"But property has carried the economy and so as the Treasurer said, the important thing now is to be cautious about how any new regulation would have an impact on property."

Peter Maloney, the chief executive of conveyancing service provider GlobalX, which handles huge amounts of property contract activity, said the interim report would be a further dampener on the market .

"The clear loser as a result of the Hayne inquiry is the property investor," Mr Maloney said.

"The report highlights the issues with the HEM and indicates a future recommendation to shift away from this model along with the confusion on kickbacks for mortgage brokers, both affect property investors in a huge way."

He said property investors often rely on mortgage brokers who, the report shows, settled 55 per cent of all residential home loans in the September 2017 quarter.

"So we can expect to see a significant drop in property investment moving forward."

He said buyers should also expect to see more even restrictions placed on credit lending, "which will result in property prices softening".

"This will negatively impact property clearance rates and transactions, with buyers expected to find it even harder to get into the market."

Since the royal commission, the big banks have increased pricing discounts for the high quality borrowers with some discounts of up to 150 basis points from the standard variable rate. But also increased pricing for interest-only borrowers and investors.

This started earlier when the Australian Prudential Regulation Authority introduced caps on lending to investor-only loans, which have now ended.

But whether it has been APRA caps or tighter, self-imposed, lending restrictions by banks, the rate of growth in home lending has started to slow and so too have house prices, with Melbourne falling 3.1 per cent since March.

AMP Capital economist Shane Oliver said the last time house prices went down, the snowball effect was avoided because interest rates were lowered. This time it could be very different.

"People are holding back from bidding, there's no sense of urgency to go to the auctions, the investor demand is substantially down on where it was 18 months ago.

"But what happens is that this can become self-reinforcing. The last two or three times in Sydney when property prices fell – 2005, 2008 and around 2012 – at least with the last two, the GFC and in 2012, the experience were brought to an end by low interest rates and so we didn't go into any vicious cycle."

"Whereas this time around there's more risk because there's unlikely to be any support from lower interest rates."

In line with the consensus of economists, Mr Oliver said it is unlikely the Reserve Bank will be cutting interest rates any time soon.

"They may cut next year but in the meantime you've got more supply coming onto the market which is resulting in rising vacancies and pressure on rents in some areas and then you've got the banks getting more concerned, so the regulator was obviously concerned late last year about households having excessive debt-to-income ratios and then that's been reinforced by the royal commission in the eyes of the public, that the banks have been too lax – whether they have or haven't, that's the perception."

And perception can be one of the biggest factors in the real estate market.

Since the royal commission started in March, commercial property values have actually increased, rising 1.7 per cent in the June quarter, above the quarterly result of March of 1 per cent, according to property index provider MSCI.

MSCI vice-president Mitchell McCallum said there is still no significant impact from the royal commission.

"If the royal commission has had an impact on debt financing it is yet to show in the property market returns," Mr McCallum said, "And in fact, capital growth in Australian property has continued to strengthen irrespective of the royal commission."

Along the way though there have been some hiccups.

The nervousness of financial planners during the royal commission hit Australia's largest neighbourhood shopping centre owner's ability to raise equity for a new property fund.

According to the landlord's chief executive Anthony Mellowes, Shopping Centres Australasia's Unlisted Retail Fund, SURF 3, sought to raise $35 million from investors - many of whom were advised by financial planners - but it only managed to raise $26 million.

"The royal commission made it very tough for us because financial planners were the main channel for distribution," he told The Australian Financial Review at the time.